CITIZENS, INC. quarterly report, Q3 FY2017

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Citizens, Inc. — Q3 2017 Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated results; dollar amounts below are in millions unless noted. Citizens is an insurance holding company focused on life insurance, with significant international business, plus home-service life and limited property insurance operations.

Financial performance

  • Q3 revenue: $64.3, up 4.2% from $61.7 in Q3 2016. Premiums were $50.2, up 2.2%; net investment income was $13.8, up 12.2%.
  • Q3 earnings: Pretax income was $3.1 versus $4.6 a year earlier; net income was $3.4 versus $2.8. Class A basic and diluted EPS was $0.07 versus $0.06. The quarter included $0.4 of net realized investment losses.
  • Nine-month revenue: $184.8, up 4.1% from $177.5. Premiums were $143.4, up 0.5%; net investment income was $39.6, up 10.0%.
  • Nine-month earnings: Pretax income was $6.1 versus $5.9; net income was $6.1 versus $1.9. Class A EPS was $0.12 versus $0.04. The 2017 period included $0.7 of net realized gains, including a $1.1 gain from selling a Little Rock office building, partly offset by investment losses.
  • Benefits and expenses: Nine-month insurance benefits were $118.5 versus $118.1. Other general expenses rose to $26.8 from $22.7, reflecting audit, legal, consulting and staffing costs, partly offset by changes in the tax-compliance estimate. Surrenders increased, particularly in the Life segment, as the policy book matures.
  • Margins: The filing does not separately present a standard operating or net margin measure.

Financial position, cash flow and liquidity

  • At September 30, total assets were $1,651.3, total liabilities $1,387.1 and stockholders’ equity $264.2. Assets were up from $1,583.7 at December 31, 2016.
  • Cash and cash equivalents were $45.0, up from $35.5 at year-end 2016. Nine-month operating cash flow was $68.9, compared with $69.2 in 2016; investing cash outflow was $61.6 versus $121.5. The company reported no investment liquidations to fund cash needs during the first nine months.
  • Investments totaled $1,285.0, including $1,191.6 of fixed maturities. Fixed maturities were 89.6% of cash, cash equivalents and investments; 97.5% were investment grade, according to the company. Net unrealized gains on fixed maturities were $42.3, versus $26.7 at year-end 2016.
  • Policy liabilities totaled $1,276.3, including $1,110.5 of life insurance reserves. The filing reports no off-balance-sheet arrangements and no material change in contractual obligations. It does not report conventional borrowings; annuity investment-contract liabilities were $54.5.
  • Management said available liquidity and expected cash flows should meet funding needs. All insurance subsidiaries were above applicable risk-based capital minimums at quarter-end.

Material changes and business developments

  • Effective January 1, 2017, CICA and CNLIC stopped selling domestic products that did not qualify under IRC Section 7702. Citizens is developing compliant products and expects to resume domestic sales after regulatory approval; management warned domestic sales may decline while products are unavailable.
  • Insurance premiums grew modestly, supported by renewal business. Life insurance issuance declined: nine-month face amount issued was $219.6 versus $248.2 in 2016, and policies issued were 3,988 versus 4,416. Home Service face amount issued increased to $141.4 from $137.7.
  • International business generated about 72% of direct premiums. Venezuela premiums were lower, and management expects further declines if political and economic conditions continue to impair sales and collections.
  • Management is reviewing domestic and international business models, products, profitability, operations and technology. A new Bermuda entity, CICA Life Ltd., was capitalized in Q3 but had no operations as of the filing. The company also sold its corporate plane and planned to dissolve the aviation subsidiary.
  • Harold E. Riley died in September 2017; the Class B shares transferred to the Harold E. Riley Foundation, which controls the company through its board-election rights. The filing says resulting changes to governance or strategy were unclear.

Outlook, risks and contingencies

  • No quantified earnings or revenue guidance is provided. Management stated that results for interim periods are not necessarily indicative of full-year or future results.
  • IRC Sections 7702 and 72(s): The company recorded an estimated $10.7 net-of-tax liability for tax and remediation exposure; its estimated range is $5.6 to $34.0 net of tax. Management cautioned actual costs could exceed the range. It submitted proposed IRS closing-agreement offers for certain domestic business and expected to file additional offers in 2018. The company estimated a further $0.75–$1.25 of 2017 costs but said these could not be reliably estimated.
  • Controls: Disclosure controls were deemed ineffective because previously identified material weaknesses in internal control over financial reporting remained unremediated. Remediation work included strengthening finance and actuarial leadership, internal audit support and control testing.
  • Litigation and unclaimed property: A putative securities class action filed in March 2017 seeks unspecified damages; the company intends to defend it and could not estimate the outcome. State unclaimed-property audits could result in additional payments, penalties or interest; potential Louisiana exposure was not estimable.
  • Principal risks: Foreign regulatory and political conditions, currency-transfer restrictions and concentration in Latin America and the Pacific Rim; investment credit and interest-rate risk; surrender activity; reserve and deferred-acquisition-cost estimates; tax compliance exposure; and regulatory, litigation, cyber and control risks.

Important facts for investors to verify

  1. Progress and final cost of the IRC 7702/72(s) remediation, including IRS responses, policyholder impacts and adequacy of the $10.7 reserve.
  2. Timing and regulatory approval of compliant domestic life products, and any resulting changes in domestic sales and distribution.
  3. Whether internal-control material weaknesses are remediated and operating effectively, and whether the actuarial-system conversion is completed as expected in 2018.
  4. Developments in foreign-market compliance and Venezuela, and the effect on premium collections and international sales.
  5. Outcomes of the securities lawsuit and state unclaimed-property audits, including whether any exposure becomes estimable or material.